“Does corporate governance report disclosure increase stock retirement? Evidence from Korea”

This study examines the influence of the mandatory disclosure of corporate governance reports on stock retirement in Korea. Given the challenges of applying stock repurchasing to measure shareholder return policy in the Korean stock market, this study focuses on stock retirement as a key indicator to examine the effectiveness of introducing the corporate governance report on shareholder return policy. Employing the Difference-in-Differences approach followed, this paper conducts empirical analyses based on 5,932 observations from 2011 to 2020. The main findings indicate a significant increase in stock retirement by companies implementing mandatory disclosures of corporate governance reports (coef = 0.018, p-value <0.01) compared to companies that do not disclose them. The results of the alternative measures for stock retirement and propensity score matching (PSM) model also present a positive association be-tween mandatory disclosure of corporate governance reports and stock retirement, respectively (coef = 0.400 and 1.421, p-value <0.01; coef = 0.019, p-value < 0.1). This study provides evidence to support the notion that introducing corporate governance reports enhances overall shareholder returns, leading to an increase in stock retirement. Moreover, these findings validate that stock retirement is an adequate proxy for analyzing the level of shareholder returns in Korean firms.


INTRODUCTION 1
According to the Korea Exchange (KRX), stock prices of 302 of 514 listed companies decreased three months after the announcement and those of 174 companies dropped the day after (E-Korea 2023).
Despite a surge in share buybacks in the Korean stock market, the stock prices often fail to meet shareholders' expectations 1 .This disparity arises because the Korean stock market permits treasury stock resale instead of retiring following a share buyback.In Germany and Japan, share buyback and resale must follow the principle of shareholder equality; therefore, regulations for issuing new shares must be followed for treasury stock resale as well.In contrast, treasury stock resale and the issue of new shares are treated separately in Korea, allowing opportunistic behavior, such as safeguarding management control without utilizing private funds.Therefore, major shareholders in the Korean stock market prefer not to retire treasury stock, which should be retired to increase the stock prices.
Effective corporate governance practices can discourage major shareholders from engaging in such opportunistic behavior.In 2019, the Financial Services Commission (FSC) of Korea introduced a cor-porate governance report 2 to implement effective corporate governance.The Corporate Governance Report requires that Korean-listed firms with assets of more than 2 trillion KRW (approximately 1.5 billion US dollars) mandatorily disclose 15 core indicators spanning three major categories: shareholders, boards, and audit committees.Mandatory disclosure is expected to increase stock retirement in three ways: First, specific principles 3 regarding shareholder rights provide that a company establishes a long-term shareholder payout policy.Second, with board category provisions, 4 transparency is expected to increase in the operation of the board of directors, preventing major shareholders from opportunistically employing share buybacks instead of retirement.Finally, the report provides additional information that improves comparability, causing a company to increase shareholder payouts to meet shareholders' expectations. 2 The corporate governance report is like the corporate governance code in the UK.The code comprises principles that must be applied and provisions that require companies to report on their governance on a "comply or explain" basis, which enables investors to deal more effectively with material governance issues of individual companies (The Financial Reporting Council 2022).The FSC presents 15 core corporate governance indicators that highlight the importance of specific principles concerning shareholder rights, emphasizing the necessity for a company to create a comprehensive long-term shareholder payout policy.For instance, Samsung Electronics Co., Ltd.established a shareholder return program under which 50% of the total free cash flow would be distributed to shareholders, including stock retirement, for the subsequent three years. 5The second aspect involves board category provisions that enhance transparency in the operations of the board of directors.This measure is anticipated to prevent major shareholders from strategically opting for share buybacks during stock retirement.Finally, the provision of additional information in the report is stated to enhance comparability, leading a company to augment shareholder payouts to meet shareholders' expectations.Therefore, introducing mandatory disclosure of corporate governance advises information users by using integrated standard measurements to examine the overall quality of corporate governance.
Furthermore, mandatory disclosure of corporate governance reports is highly accessible and regulated, which increases comparability when examining the quality of corporate governance.The accessibility of previous corporate governance dis- In Germany, stock repurchases and resales must follow the principle of shareholder equality and the same regulation for issuing new shares will be followed for stock resale.Japan also requires the same procedure for issuing new shares for stock resale, which is invalid in the case of a violation of the procedure.The U.K. stipulates that stock resale is subject to the preemptive rights of existing shareholders.According to the City Code, any defensive action that may deteriorate shareholder value is prohibited in an M&A situation.In the case of the U.S., there is no particular restriction on the sale of treasury stock.However, considering the financial market operations and litigation system, any action that reduces shareholder value is restricted (Ayres,  1990).Based on these premises, the market recognizes stock repurchases as a shareholder return policy, along with dividends (

METHODS
This study employs the DID methodology to clarify the impact of the mandatory disclosure of corporate governance reports on stock retirement.The DID methodology enables the examination of changes in stock retirement from pre-to post-mandatory disclosure periods for companies that disclose corporate governance reports relative to those that do not.The dependent variable, RETIRE, denotes the number of retired stocks divided by the sum of the initial balance of treasury and repurchased stocks in the current year (Kim  & Kang, 2018).TREATMENT represents companies with a mandatory disclosure of corporate governance reports in 2018.The dummy variable POST takes a value of 1 if the company year is 2018 or later and 0 otherwise.The interaction term between TREATMENT and POST captures the treatment effect of increasing adopters' stock retirement after the mandatory disclosure period.Firm characteristics are included as control variables, which have been shown to affect shareholder payouts (Giannetti, 2003; Petersen & Rajan 1997). 7he formal regression model is as follows.
If the stock retirement of a company with mandatory disclosure of corporate governance reports has increased since 2018, the coefficient of the interaction term between TREATMENT and POST should be positive.TREATMENT is classified based on corporate governance reports data from the Korea Investor's Network for Disclosure System (KIND) operated by the Korean Exchange (KRX).Financial data were collected from TS2000 and FnGuide databases. 8This study excludes financial institutions and companies with fiscal year ends other than December.Considering Korea's adoption of the International Financial Reporting Standards (IFRS), the sample period is from 2011 to 2020.Table 2 shows the results of a univariate analysis using a t-test to examine the difference between companies with mandatory disclosure of the corporate governance report and companies without it.Prior to the DID analysis examining the effect of introducing mandatory disclosure of corporate governance on stock retirement, this study confirmed whether the execution of stock resale and retirement appears to depend on the mandatory disclosure of corporate governance reports.Panel A presents the mean difference between the TREATMENT and CONTROL groups.The result shows that the dependent variable RETIRE is statistically significant and negative.This result  would be driven by the fact that the company with mandatory disclosure of corporate governance reports was designated a company with assets of 2 trillion KRW or more, indicating that a sufficient level of corporate governance was already implemented before the mandatory disclosure.Panel B shows the mean difference in TREATMENT for the main dependent variables by POST, and Panel C shows the same result as Panel B, that of CONTROL.The mean difference of RETIRE is statistically significant from TREATMENT only and not from CONTROL.

RESULTS
Table 3 provides the correlations between the variables.The variable representing a company with mandatory disclosure (TREATMENT*POST) is positively correlated with the dependent variable RETIRE (0.075).
In Table 4    Note: See the Appendix for the definition of the variables.All numbers in parentheses are t-statistics.***, **, and * represent p < 0.01, p < 0.05, and p < 0.1, respectively.Table 5 shows the main results of using the alternative measure of RETIRE.LN_RETIRE is the logarithm of the number of retired stocks.D_RETIRE takes 1 if the firm retires stocks and 0 otherwise.
Table 6 shows the effect of mandatory corporate governance disclosure on stock retirement using a propensity score matched (PSM) sample.The endogeneity issue could arise from the treatment firm size, which is listed companies with assets over 2 trillion KRW or more disclosed corporate governance reports mandatory.The total observation of the PSM-DID sample was 1,850 after conducting 1:1 matching.This study examined the treatment effect using the PSM sam-   7 shows the results of the main hypotheses using a balanced period.The sample is constructed from 2015 to 2020, which has 3-year of pre-and post-shock.
Finally, Table 8 shows the results of the main hypotheses using firms that executed stock repurchases in the current year.This study verified whether mandatory disclosure of corporate governance reports increases stock retirement by sampling companies in which stock repurchases are executed in the current period.The main reason for this additional test is to confirm the sample selection bias of the main analysis owing to companies that did not exercise stock repurchases.The coefficient of TREATEMNT*POST is statistically significant and positive for RETIRE.The coefficient test results are the same as those of the main analysis results.

DISCUSSION
The

RETIRE
The number of retired stocks divided by the sum of initial treasury stocks and repurchased stocks in the present year.

LN_RETIRE
The natural logarithm of the number of retired stocks.

D_RETIRE
An indicator variable takes 1 if firm retired stocks, and 0 otherwise.

TREATMENT
An indicator variable takes 1 if the firm disclosed a mandatory corporate governance report in 2018, and 0 otherwise.

POST
An indicator variable takes 1 if the year falls into 2018, and 0 otherwise.

SIZE
Natural logarithm of total assets.

MTB
Market-to-Book value.
LEV Total liabilities divided by total assets.

CASH_CE
Cash and cash equivalents divided by total assets.

ROA
Net income divided by total assets.

LOSS
An indicator variable takes 1 if net income is smaller than 0, and 0 otherwise.

INDIRECT
An indicator variable takes 1 if the stock was repurchased by indirect method and 0 otherwise.

LARGE
The ratio of major shareholders.

B_SIZE
The number of board of directors.

B_IND
The ratio of outside board of directors to total board of directors.

Category Key Indices
Shareholder ① Announced the convening of a shareholder meeting four weeks prior to the annual general meeting (Specific Principle 1-①) Corporations should provide timely access to information for shareholders concerning the date, location, agenda, etc., of general meetings prior to the meeting.② Adopted Electronic Voting system (Specific Principle 1-②) The Company should encourage shareholder participation as much as possible and ensure shareholders can propose their opinions.③ Avoiding the peak seasons for shareholder general meeting (Specific Principle 1-③) The Company should ensure shareholders can propose general meeting agenda items conveniently.Shareholders should be able to freely ask questions and receive explanations regarding shareholdersuggested meeting agendas.④ Provide annual notice of dividend policy and distribution plans to shareholders at least once a year (Specific Principle 1-④) Corporations should establish a mid-to long-term shareholder return policy and relevant plans, including those for dividends, and provide shareholders with the information.

Board
⑤ Established and implemented CEO succession plan and policies (including emergency appointment policy) ⑥ Established and operated internal control policies ⑦ Separated board chairman from the CEO ⑧ Adopted cumulative voting system ⑨ Established policies to prevent the appointment of any director who has damaged corporate value or infringed shareholder rights ⑩ Removed outside directors who served more than six years Audit Committee ⑪ Provided education program for audit committee at least once a year ⑫ Established an independent internal audit team to support internal audit tasks ⑬ Included accounting or finance expertise in the audit committee ⑭ Allowed audit committee to hold meetings with external auditors at least quarterly without the presence of the firm's management ⑮ Established and implemented procedures for the audit committee to access material information on the business operation Collectively, mandatory disclosure of corporate governance reports has increased comparability by providing standardized indicators for measuring corporate structure, and high-quality corporate governance has been shown to increase stock repurchase and enhance shareholder value.This is because stock retirement is premised on stock repurchases in other OECD countries, which is different from Korea.Therefore, considering this aspect, this study examines it through stock retirement instead of share repurchases as a shareholder payout; however, only a few studies have been conducted.As a result, this study examines whether introducing mandatory disclosure into corporate governance reports leads to increased stock retirement.As in previous studies, if mandatory disclosure in corporate governance reports enhances shareholder value, we would expect an increase in stock retirement after introducing mandatory disclosure in corporate governance reports.
Kim & Lim,  2017).However, stock resale and issuing new shares are defined separately in Korea, indicating that the decreasing shareholder value from stock resale is not legally protected.According to prior literature on stock retirement,Byun and Pyo  (2006)state that it is necessary to concentrate on whether retirement is made after the stock repurchase because stock resales are frequently executed in the Korean stock market.However,only a few of the empirical evidence of resale and retirement after the stock repurchase are provided in the prior literature, and most of the papers are from jurists regarding the legality and acceptability of stock resale(Kim,  2016; Park, 2013; Ahn, 2014; Chung, 2012).Investment Management and Financial Innovations, Volume 21, Issue 2, 2024 http://dx.doi.org/10.21511/imfi.21(2).2024.18

Table 2 .
T-test Note: See the Appendix for the definition of the variables.Table2presents the results of the t-test.Panel A shows the mean difference between the TREATMENT group and the CONTROL group.Panel B shows the TREATMENT group's mean difference in the main dependent variables by POST.Panel C shows the same result as Panel B of the CONTROL group.

Table 4 .
Corporate governance report and stock retirement

Table 3 .
Correlation matrix See the Appendix for the definition of the variables.Table3presents the correlation results between the main variables.All bold numbers are below the 5% level of significance.
Note:Investment Management and Financial Innovations, Volume 21, Issue 2, 2024 http://dx.doi.org/10.21511/imfi.21(2).2024.18Note:SeeAppendixAfordefinitions of the variables.All numbers in parentheses are t-statistics.***,**,and*representp<0.01, p < 0.05, and p < 0.1, respectively.The main explanatory variable is TREATMENT*POST, which shows the treatment effect of corporate governance report disclosures on stock retirement.Equations (1) + (3) and (2) + (3) represent the results of the coefficient tests.(1)+ (3) show the results of the stock retirement difference between the treatment and control groups after the exogenous shock.Equations (2) + (3) show the results of the treatment group's stock retirement difference between the pre-and post-exogenous shock periods.

Table 5 .
Corporate governance report and stock retirement: Using an alternative measure of RETIRE

Table 6 .
Corporate governance report and stock retirement: Using PSM ples.The samples were matched 1:1 with a 0.25 caliper distance.The propensity score was estimated by regressing the SIZE, LEV, MTB, ROA, LOSS, LARGE, YEAR, and INDUSTRY fixed effects on TREATMENT.

Table 7
presents the results of the main hypothesis using the balance period.The main sample period is from 2011 to 2020, which raises the endogeneity issue in the imbalanced period sample.The balanced period sample is reconstructed based on the mandatory disclosure year of corporate governance reports and reverted to whether the mandatory disclosure of corporate governance reports increased stock retirement.As shown in Column (1) of Table7, the coefficient of TREATEMNT*POST is statistically significant and positive for RETIRE's dependent variables.The results of the coefficient test presented the same direction as the main results.

Table 7 .
Corporate governance report and stock retirement: Using the balanced period sample

Table 8 .
Corporate governance report and stock retirement: Using the repurchased group

Table A1 .
This paper finds that companies with mandatory disclosures significantly increased stock retirement after introducing mandatory disclosure for corporate governance reports.The results indicate the significance of effective corporate governance report in enhancing shareholder value, presenting in increased stock retirement.However, a limitation of this study is that the disclosure is applied only to companies with assets of 2 trillion KRW or more in the early stage of the introduction of the mandatory corporate governance report.Interest in the disclosure and evaluation of corporate governance reports has been increasing, and this study provides implications for further research.Variable definitions CONCLUSIONThis paper aims to examine the effectiveness of introducing a mandatory corporate governance report on stock retirement.http://dx.doi.org/10.21511/imfi.21(2).2024.18APPENDIX A